Taxpayer’s $389M Award Reined In on Appeal

CARSON CITY, Nev. (CN) – California tax authorities must pay up after defrauding an inventor, but the jury’s $389 million award cannot stand, an appeals court ruled. Gilbert Hyatt’s dispute stems from the California Franchise Tax Board’s assessment of $10.5 million in taxes on his 1991 and 1992 state tax returns. The board had launched an investigation of Hyatt after one of its auditors read a newspaper article in 1993 that described the fortune Hyatt was making from a computer-chip patent he owns. A review of Hyatt’s tax returns showed that he had reported just 3.5 percent of his taxable income for 1991. In addition to finding that Hyatt owed California $1.8 million in taxes for that year, plus a $1.4 million penalty and $1.2 million in interest, the board found that Hyatt owed $6 million for 1992 because he did not move to Nevada until April that year. A Clark County jury that looked at the inventor’s 1998 complaint ultimately found that his injury stemmed from reliance on the board’s misrepresentation of the audits’ processes. Ordered to pay Hyatt $139 million for his tort claims and $250 million in punitive damages, the tax board told the Nevada Supreme Court that it should have been granted immunity. The six-justice court gave the board some relief Friday, despite endorsing the jury’s fraud and emotional-distress findings. Immunity does not shield the board from Hyatt’s intentional tort and bad-faith causes of action, but many of his other claims fail as a matter of law, according to the 68-page ruling. “Hyatt is precluded from recovering for invasion of privacy based on the disclosure of his name, address, and social security number, as the information was already publicly available, and he thus lacked an objective expectation of privacy in the information,” Justice James Hardesty wrote for the court. The jury had awarded $52 million for invasion of privacy. That amount covered the ury’s finding that the board had portrayed Hyatt in a false light as a “tax cheat.” In vacating that determination, the Supreme Court said “FTB’s contacts with third parties’ through letters, demands for information, or in person was not highly offensive to a reasonable person and did not falsely portray Hyatt as a ‘tax cheat.'” “In contacting third parties, FTB was merely conducting its routine audit investigations,” Hardesty continued. Hyatt’s claims for breach of confidential relationship and abuse of process also failed, the court found. The justices affirmed the $1 million in special damages awarded for the board’s fraud but vacated the prejudgment interest figure. Though the Supreme Court said Hyatt had substantiated his emotional-distress claim, it reversed the $82 million award of damages because of errors from the trial court on evidentiary and jury-instruction rulings. Finding that punitive damages are not available to Hyatt on remand, the court said the Nevada law authorizing such damages, NRS 42.005, does not apply against a government entity. The $2.5 million awarded to Hyatt in costs is uncertain on remand as well.